Penny stock investing mistakes can happen. The words “penny stock” strike fear into the hearts of investors everywhere, and for good reason. It’s a risky affair to get involved with, especially as so many investors have lost their money attempting to trade in these low-priced stocks.
The term “penny stock” originally was used to refer to all shares traded for a dollar or less. The US Securities and Exchange Commission, however, changed the definition to include all low price shares at $5 or less.
- Read more on the Investing Dictionary: What is a Penny Stock?
Example of highly profitable penny stocks
It is possible to make money by trading penny stocks. After all, these are shares to small, growing companies that still have limited resources and funds. Bigger investors commonly ignore them but they do have potential to be valuable over time.
A notable penny stock that succeeded is Sirona Dental Systems – a small company whose stocks were worth 27 cents in 2000. Thirteen years later, its stock is valued at $56 per share, making it one of the best examples of a penny stock success story.
The problem, of course, is that you have no guarantee that these companies will succeed eventually. For every Sirona, there is an equally dismal penny stock company dragging its investors down with it. There is a chance for great profit, but this comes at the risk of serious losses.
Penny Stock Investing Mistakes
If you still want to invest in penny stocks despite the risks, then by all means make sure you don’t commit these seven deadly sins. While this isn’t a complete list, these are the most common penny stock investing mistakes.
1. Not doing your research
Trading relies on information and market trends. You hear about the ups and downs of bigger companies on the news all the time. But penny stock companies don’t merit the same interest, and it takes double (if not triple) the amount of work to gather enough information to evaluate this investment.
Going in blind is not an option, as this puts you in a very risky position, supporting a start-up company that might never get off the ground.
2. Following bad tips
Some mistakes when investing in penny stocks are due to the fact that the stock market is never consistent. You should know that not all the investment tips and advice you receive are going to work. Most of the time, these ‘hot’ tips may turn out to be false leads set by market speculators.
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3. Not diversifying
Penny stocks are interesting, but the most important thing when building an investment portfolio is to diversify the risk. Make a mix of large caps and small caps and risky companies so that you don’t end up with nothing when your risky stocks fail.
4. “Betting the Farm”
Investing should be a way of increasing your wealth. However, you should never put in all of your “eggs”, so to speak. Before embarking on the world of trading, make sure you have a nest egg or an emergency fund that can give you a convenient cocoon should your investments fail.
If your risk tolerance is low, or your investment style conservative, you should go for more classic investments such as government bonds, real estate investments, for example.
See more:
- Classic Investments: How to Invest in Real Estate (The Basics)
- What type of investor are you? Investment styles. Questions to discover yours.
5. Decisions based on emotion
When it comes to stocks, never go with your “gut feel”. Many investors see penny stocks and begin to romanticize the story of a small start-up that will eventually make it big and make a fortune from it.
Many investors see penny stocks and begin to romanticize the story of a small start-up that will eventually make it big and make a fortune from it.
If you start letting your emotional attachment to a company cloud your judgment, you’re definitely going to lose money big time.
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6. Not being realistic
It seems like a lot of people have very unrealistic expectations of trading, especially where penny stocks are concerned. The “underdog” stocks often seem like the ticket to earning millions, and this sort of fantasy can cloud an investor’s expectations.
7 No exit strategy
Many investors never know when to give up on a penny stock. They keep hanging on hoping things will improve over time. It’s important to know when to fold ‘em, as Kenny Rogers once said. Although the trade can pick up again eventually, nothing is certain and sometimes, cutting your losses is the only option.
In conclusion, penny stocks are not a good investment for the novice investor. Avoid these penny stock investing mistakes. Remember, always do your research before investing in any stock and avoid costly and devastating losses.